Thegreek.com, a horse racing blog, discusses the "seven deadly sins" losing horse bettors commit. Repeat these sins in your trading, and you'll suffer the same fate as the losers at the track.
Here are the four most important sins to avoid:
Deadly Sin No. 1: The most important thing is picking winners
The few horse bettors good enough to make a living know it's not about picking a winner. It's about identifying positive expected value . Often that means the lower probability play is the better bet.
If an option is currently priced to profit one in 10 times, but you think it'll profit two in 10 times, then buy it. It's a value. It doesn't matter that most of the time the option will expire worthless . Over the long haul, the buyer will walk away profitable.
Deadly Sin No. 3: You should bet more on a horse you really like, such as your 'best bet'
Professional track gamblers understand that bet size is incredibly important. Sizing your bets based on "hunches" leaves you susceptible to accidently betting big on losers and tiny on winners.
Imagine three trades where you're right on the first two and wrong on the last . And since you thought you had a "hot hand," you bet really big on that last loser. This would result in the losses from the last trade canceling out the gains from your first two winners. Your account would end up net negative.
Sizing up has a time and a place in trading. George Soros would bet big when the stars aligned. But you need lots of experience before you can start sizing up on what you think are great trades.
Until you're seasoned and able to determine between a good and great bet, keep your position sizes consistent. If you don't, you risk going broke from bad luck.
Deadly Sin No. 4: Statistical betting trends are important
Ever wonder why those really smart quants with the fancy degrees end up blowing up? It's because they have too much trust in a model tightly fit to past data.
Studying the past can help you figure out what'll happen in the future, but only within reason. If you create a trading model based on the premise that the future will play out exactly like the past, it will fail.
Keep historically based assumptions as simple as possible. That will help thread the needle between useful insight and robustness.
Deadly Sin No. 7: Specialize in certain aspects of the game and pick your spots
That's why our team at Macro Ops trades global macro. If stocks dry up, we have the flexibility to drop into the grains market or currencies or any other market where there's high expected value profit opportunities. The more markets you learn to trade, the easier it is to trade only the most attractive setups.
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This article first appeared on GuruFocus .